Accel's Facebook investment may lead to big payday

VENTURE CAPITAL

Ari Levy, Bloomberg News

Published 4:00 am, Wednesday, January 18, 2012

Photo: Andrew Harrer, Bloomberg News

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Jim Breyer, a partner with Accel Partners who is a board member of Facebook Inc., center, speaks to attendees following a session on the first day of the World Economic Forum (WEF) Annual Meeting 2011 in Davos, Switzerland, on Wednesday, Jan. 26, 2011. The World Economic Forum in Davos will be attended by a record number of chief executive officers, with a total of 2,500 delegates attending the five-day meeting that starts in the ski resort today. Photographer: Andrew Harrer/Bloomberg *** Local Caption *** Jim Breyer less

Jim Breyer, a partner with Accel Partners who is a board member of Facebook Inc., center, speaks to attendees following a session on the first day of the World Economic Forum (WEF) Annual Meeting 2011 in Davos, ... more

Photo: Andrew Harrer, Bloomberg News

Accel's Facebook investment may lead to big payday

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A few months after struggling to raise a new fund in 2005, Accel Partners bet $12.2 million on a website run by a college dropout. Seven years later, that wager is poised to be the most profitable ever for a venture firm.

Accel, whose partners include Jim Breyer and Kevin Efrusy, is the top outside investor in Facebook, owning about 10 percent. Assuming Facebook is valued at $100 billion, Accel's stake on paper is worth about $10 billion.

When Accel made its Facebook investment, the site had just 2.8 million users - all on college campuses - and was run by 21-year-old Mark Zuckerberg. Now it has 800 million members worldwide and an estimated $4.27 billion in 2011 sales, according to EMarketer. That explosive growth is poised to deliver an 800-fold return on Accel's money, catapulting the firm to the forefront of the venture industry.

"This is what makes venture capital and Silicon Valley unique in the world," said Steve Blank, who helped found eight companies and now teaches entrepreneurship at UC Berkeley and Stanford University. "It's what VCs do incredibly well. Accel, in this one, deserves all of it."

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Accel's prospective payday shows the hits-driven nature of the venture business, where one investment can make an entire fund profitable and establish a firm as the market leader. Kleiner Perkins Caufield & Byers had that distinction from early bets on e-commerce and Web search companies, before missing out on most of the social-media leaders. It later bought shares of Facebook and Twitter at less favorable prices.

Facebook plans to raise $10 billion in initial public offering, with a filing coming soon, a person with knowledge of the matter said in November. The offering would value the Menlo Park company at more than $100 billion, according to the person.

Founded in 1983 by Arthur Patterson and Jim Swartz, Accel was an unlikely investor in Facebook. The firm focused on hardware companies such as UUNet Technologies and Redback Networks rather than Internet companies during the dot-com boom of the late 1990s. Google, Amazon.com, Yahoo and Netscape Communications went on to produce billions of dollars for other venture backers.

Accel began raising money for a more Web-focused fund in the mid-2000s, though that effort faced challenges. Harvard University and other prospective investors backed out of the fund, forcing Accel to cut the size of it to $440 million - smaller than any investment pool it had raised since 1998.

In May 2005, less than six months after completing the fundraising, Accel made one of the first investments: a startup that was then called Thefacebook. Zuckerberg had begun the company during the previous year in his Harvard dorm room.

Breyer and Efrusy oversaw Accel's $12.2 million investment, which assumed a $100 million valuation, and Breyer gained a seat on the Facebook board.

"It was a big leap of faith at the time," Efrusy said in an interview in March. "Any one of these investments you do, in hindsight they may look obvious, but at the time they look scary."

Accel declined to comment for this story.

Investors in Accel's fund have already seen some of the rewards. By selling 17 percent of its original Facebook stake last year at a $34 billion valuation, Accel paid back investors in the 2005 fund, while holding on to the bulk of its stake for future gains.